Summary:
Estimates have been going up ahead of Greif’s third-quarter fiscal 2016 earnings
release. The company has a positive record of earnings surprises in recent quarters.
Greif expects its fiscal 2016 results to gain from implementation of transformation
efforts. The company raised earnings per share guidance for fiscal 2016 to the range
of $2.20 to $2.46. Further, Greif’s second half of the fiscal year is historically stronger
due to seasonality, particularly tied to the agricultural markets. It will also benefit from
sale of non-core assets, consolidation of facilities, investment in capacity and cost
reduction activities.
Reasons to Buy:
- Greif raised earnings per share guidance for full-year fiscal 2016 to the range of $2.20 to $2.46, from the prior band of $2.10 to $2.40 per share. This excludes gains and losses on the sale of businesses, timberland and property, plant and equipment, acquisition costs and restructuring and impairment charges. The company expects fiscal 2016 results to continue to gain from further implementation of its transformation efforts. Further, the company’s second half of the fiscal year is historically stronger due to seasonality, particularly tied to the agricultural markets.
- Even though the flexible products business (FPS) had an operating loss of $1 million in the second quarter, Greif expects the segment to deliver positive EBITDA in fiscal 2016. Further cost reductions, improvement in under-performing operations in specifically Turkey, Mexico and Vietnam and focusing on completion of the commercial initiatives will drive growth.
- Greif has been successful in fixing under-performing businesses and divested non-core assets and closed facilities which will drive long-term performance. The company completed three divestitures in a period of six months ending April 30, 2016. The gain on the disposal of businesses was $2.8 million in the six month period. Greif also continues to accelerate headcount reductions, and slash entertainment and travel budget by increasing video conferencing usage and eliminating all non-sales related travel. These actions will be accretive to earnings.
- Greif’s plans to expand gross margins are gaining traction. The company is executing process improvements in all commercial sourcing supply chain and operations. In addition, the company raised free cash flow range guidance to $130 million to $160 million.
- Greif’s IBC business in North America had the best volume in past six quarters. The business continues to improve in fiber in spite of its largest customer plant being closed. The company started to enter into the seasonal agricultural markets which will be positive. Moreover, the ISM (Institute for Supply Management) index rose in June to 53.2 and it's been over the target expansion range of 50 in the past three months.
Risks:
- Greif’s fiscal 2016 results will be affected by a sluggish global industrial economy, weaker containerboard prices and the continued strengthening of the U.S. dollar compared to other currencies.
- Even though Greif will benefit from its strategic transformation plans in the future, this has resulted in significant impairment and restructuring charges. During the second quarter fiscal 2016, Greif recorded restructuring charges of $5.4 million, consisting of $4.3 million in employee separation costs and $1.1 million in other restructuring costs, primarily consisting of professional fees incurred for services specifically associated with employee separation and relocation. The company has increased restructuring expense by roughly $5 million for the full year 2016.
- Falling oil prices has a direct impact on demand for industrial packaging in the energy sector. A number of energy producers had cut exploration and production activities in response to sharply declining oil prices, especially the North America focused smaller companies. Lower oil prices have also started to impact the cost of Greif’s raw materials.
- Industrial economy in Europe remained unchanged in the past six months. Greif witnessed slow and steady growth in the majority of EMEA region. Further, the company continues to see a very broad slowdown in China, which is particularly impacted by continued pressures caused by supply and demand imbalance in a lot of the commodity material sectors.The company also doesn't see any short-term relief in Brazil. This has negatively impacted steel drum business that serves the industrial sector. These factors remain headwinds in the near term.
